Buildup of Household Debt Exacerbates Recessions, IMF Says

An analysis of effects of household debt in the aftermath
of housing market downturns also showed that monetary easing can
mitigate “excessive contractions” during such slumps, the IMF
said in a chapter of its World Economic Outlook report released
today.

In the five years before 2007, the ratio of household debt
to income in advanced economies rose by an average of 39
percentage points, to 138 percent, the IMF said in its report.
In Denmark, Iceland, Ireland, the Netherlands and Norway, debt
peaked at more than 200 percent of household income.

“Housing busts and recessions preceded by larger run-ups
in household debt tend to be more severe and protracted,”
according to the report. “Government policies can help prevent
prolonged contractions in economic activity by addressing the
problem of excessive household debt.”

The IMF said macroeconomic policies are crucial during
“episodes of household deleveraging.” Monetary easing in
economies where mortgages normally have variable interest rates
can reduce mortgage payments and avert household defaults,
according to the report.

“There are really very stark facts about the U.S. housing
market,” Daniel Leigh, an IMF senior economist, told a news
conference this morning in presenting the report. “About 2.5
million properties are in foreclosure. The banks have taken back
keys. This is even worse than that because another 1.5 million
households are delinquent. These are staggering numbers.”

In another section of the report, the IMF said that “given
weak global activity and heightened downside risks to the near-
term outlook, commodity exporters may be in for a downturn.”

“If geopolitical oil supply risks materialize, oil prices
could rise temporarily, but the ensuing slowdown in global
growth could lead to a decline in the prices of other
commodities,” the IMF said.